Ann Pettifor

Debts and deficits: stocks and flows

6th December, 2009.

Most economists (who should know better) confuse the government’s budget deficit with total government debt.

The distinction really is important.

Mixing them up is a little like confusing stocks and flows.  Or confusing your outstanding mortgage – say £200,000 – with your monthly debt repayments. They are quite different things, and if you were to lose your job, the flows (paid with your salary) come to a halt, and then it’s the stock – the £200,000 – that really matters.

Furthermore it is quite possible to increase your mortgage – and lower your monthly payments.  Many did this in the boom years of mortgage re-financing. Or even to decrease your mortgage and increase your monthly payments.

So, just as the movements in regular mortgage payments tell us little about the outstanding stock of debt, so government deficits tell us little about the stock of debt invested and the stock of debt outstanding.

The key point is this: the annual budget deficit is not a measure of the scale of government spending.  Instead it is a measure of the outcome of that spending. And that spending may not be evidence in itself of fiscal stimulus.

The annual deficit could rise because the government cuts public investment – and thereby increases spending on unemployment benefit payments and lost tax revenues from those made unemployed by the cuts.

In other words, it could just be evidence of the rise in automatic transfer payments – like increased unemployment benefits, combined with a fall in government revenues from taxes.

And if GDP is declining, then of course the government deficit rises as a share of that.

The right focus therefore is not on the deficit, but on government final consumption or total government investment.

But most economists don’t.

Instead they home in on the deficit.

It’s not clear why.  Anyway, this gives me a chance to reproduce once again the chart of the British government’s stock of debt since the 1850s – a chart which shows how low the government’s current debt stock is relative to earlier periods of crisis.

(for more on the public sector debt, see my post of 28 October, 2009 here


3 thoughts on “Debts and deficits: stocks and flows”

  1. I take it you are suggesting that the stock (mortgage outstanding) is low compared to other periods of


    My question is how much has the structure and reporting of debt changed since those earlier periods.

    How much debt is there

    owed by UK to other countries or in international markets?

    What is in the Bank of England’s books?
    What is owed by commercial banks and

    backed up by we the people and/or the government?
    What is off balance sheet – PFI I think it is called?

    The total amount is nearer to

    several multiples of GDP, isn’t? How does that compare with earlier crises?

    My thinking is that it is this figure that tells us how much

    strain the country is under. The government debt in those terms is like the petty cash box, isn’t? Do educate me!

  2. Jo, thanks for this…According to the HM Treasury the stock of debt right now is about 55% of GDP. Due to rise

    to 70%. You will see from the chart how that compares with earlier periods (and yes the numbers are comparable….the Treasury has been careful.)

    No, its not several multiples of GDP – its only 55% of GDP.


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